After reading through half of "I'll teach you to be rich" (I told you I was a speed reader), I've got a much better understanding. And for those that may not have an IRA account, here’s the quick info:
It is a retirement funding source, just like your 401k. But the similarities end there. While a 401k or similar retirement accounts are funded with pre-tax contributions (meaning that there is no tax taken at the time of the contributions), IRAs are funded with post-tax contributions. For example, if you have $100 for a contribution in any given period, and you have a tax rate of 25%, you could fund your 401k for the full $100 or your IRA for $75.
Taxation is the main difference between all of these methods. With my 401k, I won’t get taxed on the contributions or gains until I start withdrawing. Fees and such apply if I withdraw before age 59.5, but that seems to be the same with all retirement funds.
There are two types of IRA with two different taxation systems: the Traditional IRA and the Roth IRA. The Traditional IRA allows you to make tax-deductible contributions, so you are deferring the taxation until you start withdrawing. With the Roth IRA, you can’t deduct your contributions, so you are paying the full amount of taxes upfront in order to not get taxed when you start withdrawing. Sorry, I am terrible at explaining things like this, and I don’t want to lecture you, as I am sure too many are already very knowledgeable on this sort of account.
All said and done, I really, REALLY want to open a Roth IRA. I’ve been researching fees, companies, funds and so on. So far, I know there’s a minimum to open most accounts, between $1,000 and $3,000. I know I don’t have that amount handy, and probably won’t be able to come up with it until late spring after taxes are paid for. But it has brought a slew of questions I need to explore, such as: should I pay debt or should I save? How much can I tweak my current debt paying strategy? Should I start saving for other things now, like car down payments and house down payments? The book has brought a lot of things into focus that I had considered minor before, so February should keep me properly amused in the long run as I explore new financial topics!
Great questions. I have always tried to pay debt and save at the same time, but I never really made good headway on the savings until I automated. I think that's something Ramit (and others) strongly advise. I set up my bank account to transfer, on the date of every paycheck, X amount to savings in another bank (harder for me to get to) about two years ago, and I so regret I didn't do this sooner. I didn't know if we would be able to afford it, but we can, and our savings has steadily increased.
ReplyDeleteI read your post about finding Ramit's book discounted and immediately went to Amazon, but it was already full price again. Bummer!!! I might buy it anyway. I've been reading his blog for a while and I like his "voice."
Good luck with re-visioning your financial strategy.
Aww, sorry you missed it. It's a great book, I totally recommend it. I read it from cover to cover on my computer and it was worth it. I wonder if perhaps you could find a physical copy somewhere for cheaper?
DeleteBetter late than never Tanner and you nailed the explanations. I don't think you could have done it much clearer and the examples you used were easy to understand.
ReplyDeleteOur system in Barbados is closer to the Canadian so we have RRSPs here but no matter which you choose; saving for retirement is awesome. If I had the choice, I too would go for the Roth IRA. I hope you can open your's soon. Good luck.
Awesome, maybe we can both open one at at the same time!
DeleteCharles Schwab allows you to open an account for less than $1000 if you set up $100/month direct deposit.
ReplyDeleteGood luck as you figure out what's next.
I don't think I've checked Charles Schwab closely yet, so I'll take a look at them. Thanks for the suggestion!
DeleteI know this goes against certain financial experts advice but I don't think its practical to pay down all your debt before you start investing.
ReplyDeleteOh, it's not against a lot of advice. I myself would rather pay it just to see it off, but then when comparing a 2% interest on a debt vs a possible 7% return, it gets a bit tougher to pick.
DeleteAre you comfortable sharing your age? I think if you're over 28 or so, I would start investing before paying off debt. I may think different depending on the interest rate on your debt, but basically, compound interest is on your side, even if you start small with your investing now.
ReplyDeleteHave you checked into Fidelity? We also use Charles Schwab, & highly recommend both.
Yup, totally. I am 26. I am thinking of paying off a total of 3 student loans (of 5) which are 5-6% each, and invest while paying the other 2 loans at a much slower rate.
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